A Delaware bankruptcy court judge ruled yesterday that Frank McCourt must work with Major League Baseball regarding $150 million in debtor in possession (DIP) funding, the finances that will shepherd the Dodgers through the bankruptcy process. McCourt had argued that he preferred using hedge fund Highbridge Capital over MLB’s financing as a matter of the league attempting to wrest control of the club away from McCourt.

As Judge Kevin Gross said in his ruling, “Debtors not only failed to attempt to obtain unsecured financing, they refused to engage Baseball in negotiations because, they explained, Baseball has been hostile to Debtors” adding later, “The Court finds that the Baseball Loan is not a vehicle for Baseball to control Debtors.”

But, Gross did make sure that MLB would be held in check regarding any attempts to take over the club from McCourt. “The Baseball Loan must be independent of and uncoupled from Baseball's oversight and governance of the Dodgers under the Major League Baseball Constitution,” said Gross in his ruling. “The Court, if necessary and as always, will provide ready access to Debtors in the hopefully unlikely event that Baseball strays from its obligations to act in good faith as Debtors` lender.”

The court also sided with MLB in saying that McCourt was in conflict of interest regarding his wish for Highbridge over MLB. As Gross said further, “The evidence shows that if Debtors, controlled by Mr. McCourt, did not seek court approval for the Highbridge Loan, Mr. McCourt would personally owe $5.25 million to Highbridge. Such potential personal liability clearly compromised Debtors'/McCourt's independent judgment… ”

McCourt will not have to pay the $5.25 million fee as Judge Gross had ruled previously that $60 million of the $150 million could come from Highbridge. However, the hedge fund did collect $5.5 million in fees for the $60 million deal

The ruling sets up an Aug 16 hearing in which Gross will determine whether McCourt will be able to auction off the television rights of the Dodgers. Ultimately, this aspect is key to McCourt being able to retain the Dodgers and was done so after Commissioner Selig rejected McCourt’s request to an extension of the current Fox television rights deal with the Dodgers. In that deal, $385 million would be loaned up front, but just $235 million would go to the club; the balance was designed by McCourt to take care of his personal debt and legal fees incurred in large part through his divorce from his former wife, Jamie.

The ability of McCourt to gain the auction for the TV rights will be a difficult one to gain. While the court has the right to override contractual obligation, the current Fox deal with the Dodgers doesn’t expire until 2013 and, under the contract, right of first refusal negotiations to renew cannot take place until Nov. 12 of 2012. If Gross were to side with McCourt, Fox would most assuredly sue to retain control.

McCourt will likely argue that MLB erred in not granting the extension, however, MLB has blocked television extensions prior. Tom Hicks, just prior to defaulting with the Rangers, sought an extension with Fox. The league rejected that deal for the same reasons that they rejected the Fox extension for the Dodgers. As Selig said in his letter to McCourt rejecting the deal, “While anyone of the factors identified would alone give me serious pause, collectively, and viewing the Proposed Transaction in the context of the Club's and your overall situation, they demonstrate overwhelmingly that the Proposed Transaction is neither in the long-term interests of the franchise nor consistent with the best interests of the game of Baseball.”

Select READ MORE to see key details between the Highbridge and MLB loan proposals, as well as additional analysis

The details of the Highbridge Captial loan were revealed in Judge Gross’ ruling. The essential terms of the Highbridge Loan were as follows:

Amount:

$150,000,000 multiple draw term loans (of which $60,000,000 has been funded)

Rate:

* LIBOR plus 6.00%5 for LIBOR Loans with a LIBOR floor of 3.00%

Timing of Interest Payments:

Paid at the end of an Interest during term of the facility

Number of Borrowings:

Borrower may only specify up to two Borrowing Dates during any 30 day period

Fees:

Closing date fees paid per Fee Letter:

Closing commitment payment: 3.5% of the DIP Loan Commitment 250 000) which has already been paid

Agent fee $50 000 (paid annually)

Additional Credit Agreement Fees:

Delayed draw fee 0 50% of undrawn

commitment

Deferred commitment tee $4 500 000 upon earlier of repayment in full and maturity

Audit and collateral monitoring fees

Maturity:

June 27, 2012 (before expiration of Fox Sport right of first negotiation)

* The London Interbank Offered Rate (or LIBOR, ) is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).

Gross’s ruling sided with MLB over the terms of each deal. As Gross outlined in his decision.

A comparison of the Highbridge Loan and the proposed Baseball Loan clearly shows the substantial economic superiority of the Baseball Loan, as follows:

Comparison of Material DIP Terms

Highbridge

MLB

Fees:

0.50% Delayed Draw Fee

$4.5 MM Deferred Comm Fee

$5.25 MM Closing Comm Fee

$50,000 Annual Agent Fee

None

Interest Rate:

LIBOR + 6%

(3% Floor)

Base Rate + 6.0%

LIBOR + 5.5%

(1.5% Floor)

Base Rate + 4.5%

Security:

All Estate Assets

Unsecured

Priority:

Super-Priority Administrative

Administrative

In Event of Default:

Case Dismissal

Trustee or Examiner Appointed

Termination of Debtors’ Rights under Baseball Agreement

No Onerous Events of Default

Maturity Date:

June 27, 2012

(Before Fox Sports’ Right of First Negotiation)

November 12, 2012

(After Fox Sports’ Right of First Negotiation)

The judge sided with MLB for good reasons as the terms are exceptionally good from MLB. In fact, one aspect could come back and bite MLB.

Under “Events of Default” MLB is listed as “No Onerous Events of Default”. In other words, if McCourt defaults on the loan, there is no recourse. They may be forced to eat the loan, something that would surely raise the ire by the owners. In the terms of the Highbridge loan, the Dodgers would have lost their protective rights under MLB’s agreement.